How to Compute Income Tax on Salary with Example
Income tax is seen by many as an evil which is force upon us to carve a good amount from our earnings. The constantly changing tax laws and terms like tax savings, tax rebate, tax exemption, tax deduction, TDS, TCS and multiple sections etc., make taxes difficult to understand. In almost every case, we do not realise how much money we are taxed on and how much money we can save or even how to plan it and save it as a common man.
In this article, we demonstrate you how you can compute your income tax as well as introduce the best tax saving options – so that the next time, you can do your own computation or simple maths and take enough measures to save as much tax as possible which would help you increase your savings and keep your earnings safe every year. Prior to continuing, let us together first understand what income tax means and some of the major components for calculating income tax.
What is Income Tax?
An income tax is a tax levied by the federal government on people and/or businesses (taxpayers) in relation to their income or profits, as defined by the Income Tax Act of 1961. (Commonly known as taxable income). In most cases, income tax is determined by multiplying a tax rate by the amount of taxable income. Tax rates mostly would differ depending on the taxpayer’s qualities, their kinds of earnings and sources of income coupled with various other factors.
The income tax statute of 1961 divides one’s earnings into five categories:
- Income from Salary
- Income from House Property
- Income from Business Profit
- Income from Investments/ Capital Assets
- Income from Other Sources.
What are the Components in Computing Income Tax?
When computing income taxes, there are a few things to keep in mind. Here’s a rundown of the essential elements:
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Financial Year or FY
The financial year which is simply termed as FY, is the period during which money is accumulated or earned by the taxpayer. It covers the period from April 1st to March 31st of the following year. During this period, you must prepare all of your investment evidence and assemble all of your documents.
FY 2022-23, for example, covers the period from April 1, 2022, to March 31, 2023.
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Assessment Year or AY
An assessment year is the year in which your revenue from a certain financial year is examined.
For example, AY 2022-23 is the year 2023, and it will be used to compute your earnings from April 1, 2022, to March 31, 2023.
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Tax Deductions
They allow you to lower your total taxable income under Section 80 of the Income Tax Act, Chapter VI-A.
For example, under Section 80C of Chapter VIA of the Internal Revenue Code, you can claim a tax deduction of up to $150,000 on premiums paid for life insurance plans and other investments listed in Chapter VI. This is one of the most popular strategies to save money on taxes.
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Tax Exemptions
It’s a set amount taken from gross income before tax is calculated. Sections 10 and 54 of the Act contain these exclusions. The following are the details:
Salary Income Allowances, Exemptions, and Deductions
– Leave travel concession as per clause (5) of section 10;
– House rent allowance as per clause (13A) of section 10;
– Some of the allowance as per clause (14) of section 10;
– Standard deduction, entertainment allowance deduction, and
– Professional Tax/ Employment tax deduction as per section 16.
Deductions on Rental Income from House Property
- Section 24 interest is interest paid on a house loan. In the case of self-occupied or unoccupied property, interest on the residence might be deducted.
- Losses incurred under the heading income from house property for the leased house will not be permitted to be set up against any other head and will be allowed to be carried forward as allowed by law.
Deductions from Business or Professional Income
– Expenses incurred in the course of operating such a company or profession – Asset depreciation and extra asset depreciation
– Deduction for contributions to or expenditures on scientific research – Rent, rates, taxes, building repairs, and insurance
– A donation to the workers’ recognised provident fund, authorised superannuation fund, or approved gratuity fund.
TDS or Tax Deducted at Source
The abbreviation TDS refers to the tax deducted at source. If a payment exceeds specific threshold restrictions, any firm or person making the payment is obligated by the Income Tax Act to deduct tax at the source. TDS is required to be deducted at the rate which is specified as per the sections under Income Tax Act.
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Breakup for Salary
Understanding how your compensation is broken down is the first step toward determining your income tax. On the pay slip or salary statement, you’ll see the wage breakdown.
By carefully reviewing the slip or statement, you may learn about the key components and basic structure of your pay.
Taxable Income = Total Income (Sum of all Your Earnings) – Eligible Deductions
After you’ve gotten a breakdown of your pay, you’ll need to figure out your taxable income. Any sources of income other than your wage on which you must pay taxes are referred to as “taxable income.”
| Income Source | Description |
| Income from Salary | For the purposes of the Income-tax Act of 1961, “salary” refers to both monetary and non-monetary payments (e.g., basic salary, bonus, commission, allowances, and so on) (e.g., housing accommodation, medical facility, interest free loans etc.). The term “Salary” is defined under Section 17(1). |
| Income from House Property | Income derived from a home or a plot of land (rented or self-occupied). |
| Income from Business/ Profession | Any profit or loss displayed in a profit and loss statement after a taxpayer has deducted all of his or her allowable expenses. Both positive (profit) and negative (loss) revenues are included in the income. |
| Income from Capital Gains | Profits or gains from the transfer of a capital asset in the preceding year will be subject to income tax under the heading “Capital Gains.” Such capital gains will be treated as income from the year in which the transfer occurred. |
| Income from Other Sources | Any income that does not fall under one of the other four kinds of income is taxable as income from other sources, and is referred to as residuary income. |
Computation of Tax Payable
The final and most significant step is to figure out how much tax you’ll have to pay. The tax amount you must pay to the Income Tax Department is the amount you obtain after subtracting all relevant deductions and TDS. If your total income is less than INR 250,000, you do not have to pay income tax. You must pay income tax based on your income bracket if you earn more than INR 250,000.
The following are the appropriate tax rates/tax slabs under the old and new tax regimes for an individual taxpayer under the age of 60. The taxpayer can choose between these two tax systems.
| Tax Slab (INR) | Old Tax Rates | New Tax Rates |
| 0 – 2,50,000 | 0% | 0% |
| 2,50,001 – 5,00,000 | 5% | 5% |
| 5,00,001 – 7,50,000 | 20% | 10% |
| 7,50,001 – 10,00,000 | 20% | 15% |
| 10,00,001 – 12,50,000 | 30% | 20% |
| 12,50,001 – 15,00,000 | 30% | 25% |
| 15,00,001 &above | 30% | 30% |
These rates apply for the fiscal year 2022-23, which corresponds to the Assessment Year (AY) 2022-23. The overall tax rate is subject to surcharge and health and education cess in addition to the total amount due.
Additionally, taxpayers who choose concessional rates under the New Tax system will be compelled to sacrifice various tax exemptions and deductions that were previously accessible. Under the new tax system, a total of 70 deductions and exemptions are no longer accessible. It’s best to go through the list ahead of time.
Are the Allowances Taxable Fully?
Salaried people are frequently faced with the difficulty of deciding which allowances are taxable and which are not, as well as the potential consequences of a tax debt.
Allowances of a certain sort or for a specific purpose are frequently given to employees by businesses and organisations. The first and most crucial step is to investigate the nature of the allowance being granted. The two most crucial factors to examine here are the mannerisms of allowance disbursement and the type of the stipend. To begin, an individual must understand the distinction between reimbursements for expenditures such as transportation and a basic allowance.
It’s important to remember that reimbursements are always tax-free because they’re merely a simple sum reimbursed by the employer for expenditures spent by the employee for certain services/products. If the money is supplied in the form of an allowance, however, it will be taxed unless the firm declares it to be tax-free.
Other benefits, such as leave travel allowance and children’s allowance, are normally tax-free up to a point, beyond which they are taxed. This is entirely reliant on how the individual decides to use the money provided as a gift. Determine and categorise your allowances to determine which ones are taxed and which aren’t.
Allowance for Entertainment
When calculating an individual’s gross wage, a deduction of INR 5000 is granted as an amusement allowance. It is one of the most important factors taken into account when calculating gross income. This benefit, however, is exclusively available to government employees.
If an employee receives an entertainment allowance, the money is first distributed along with the person’s basic wage, according to Section 16(ii) of the Income Tax Act. Following that, it will be examined for deduction. This allowance will account for one-fifth of the person’s income and will be in addition to any other allowances or perks.
Professional Tax: Individuals with salaried incomes, trades, jobs, and callings are subject to a tax imposed by the federal and state governments known as professional tax. This amount of professional tax does not exceed INR 2,500 per year.A taxpayer has entire right to claim a tax credit for the professional tax that he or she pays to his or her employer under Section 16(ii) of the Income Tax Act, 1961. This deduction, however, will only be permitted in the year in which the person pays the tax. In any instance, a late professional tax cannot be considered for a deduction.
FAQs or Frequently Asked Questions
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What is the meaning of Taxable Income?
Salaries, wages, bonuses, and other forms of taxable income, as well as unearned and investment income, are all included in taxable income. It’s the figure that’ll be used to calculate your tax bill.
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What all will be covered under Income from Salary?
Dearness allowance, travel allowance, housing rent allowance, and various other reimbursements and allowances which are all included in the compensation.
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What types of incomes are subjects to Income Tax?
As per Income Tax Act, 1961 the incomes to be taxed are classified into five incomes. And this includes the following:
- Income from Salary
- Income from house property
- Income from profits and gains of business or profession
- Income from Capital Gains
- Income from Other Sources.
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Should I pay tax on the gifts which are received by me during a Financial Year (FY)?
Unless you receive a present worth more than INR 25,000 from a family or on the occasion of your wedding, you will be required to pay tax if you receive a gift worth more than INR 25,000. Even gifts received as a result of a bequest or inheritance are tax-free.
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Which all are considered as Income from Other Sources while filing Income Tax Return (ITR)?
Income from other sources basically includes:
- Income from interest,
- Income from dividend,
- Gifts which are taxable and such other incomes which does not fall under the other five heads of income like:
- Income from Income from Salary
- Income from house property
- Income from profits and gains of business or profession
